Rule-Based Delegation or Reward-Based Contracting? Central-Local Governance of China’s CCER Program

This study examines how inherited local regulatory discretion shapes rule-based delegation and reward-based contracting in China’s Certified Emission Reduction (CCER) program. We develop a principal-agent model with endogenous allowance and offset markets, privately observed regional emissions, and divergent central–local policy preferences. Using equilibrium analysis and mechanism design, we analytically characterize governance arrangements in two institutional settings: Greenfield regions where no policy-specific local regime predates central intervention and Brownfield regions where a legacy regime preserves local discretion. The benchmark balances compliance-cost savings from offsets against reduced internal abatement. In Greenfield regions, the optimal upper-limit rule implements transfer-free interval delegation, preserving local discretion below a central cap and constraining it above the cap. In Brownfield regions, the legacy outside option introduces a type-dependent participation constraint, and policy adjustment requires rewards covering policy compensation and, where needed, information rent for truthful reporting. Information-rent costs shift policy toward local preferences relative to the symmetric-information contracting benchmark. Sufficiently effective rewards induce adjustment across all types; weaker rewards leave higher-emission types at their preferred policies without payment. The results identify the continuation value of local discretion as a source of implementation costs and explain how institutional history shifts policy coordination from rule-based restrictions toward reward-based contracting.